How to invest in debt-equity combination for the long term

Anisha holds a PPF account. She also has an ongoing SIP in an ELSS mutual fund. She has been regularly investing in both every month and intends to do so for next 15-20 years. In the past few years, the returns from her SIP have been falling, while PPF has given low but steady returns. She wonders if her long-term savings will get eroded with the falling SIP returns, and if she should simply close the SIP and invest only in the PPF instead. What should she do now, given the state of the economy?

Anisha’s approach to building long-term wealth is very sensible. Her choice of products is also good, since both PPF and tax saving equity funds are designed as long-term products, that are easy to use and provide decent returns. The important difference between the two products is the manner in which they generate returns. PPF is a government-sponsored scheme, where the interest rate changes are announced every quarter in line with the market rates. For an investor, the direction of the rates is at least predictable even while the actual rate may vary quarter-on-quarter depending upon the market conditions. PPF is an income-oriented scheme that earns its returns primarily from interest income. The best thing about PPF is that its interest is tax-free and is re-invested every year. Therefore, a steady growth can be achieved with PPF.

Equity-linked tax-saving schemes of mutual funds are managed portfolios of equity shares. The return on these products depends on the market return from equity, which is subject to economic cycles. By its very nature, equity investment will be volatile, earning higher than the PPF in an upcycle and doing worse than the PPF in a down cycle. However, given Anisha’s long-term investment horizon, it would even out. Combining the two products gives Anisha the best of both worlds. She has the safety and stability of the PPF combined with the growth and appreciation of equity. Investing in falling markets provides Anisha the added advantage of lower cost. She should persist with this sensible strategy to build her long-term wealth.

Content on this page is courtesy Centre for Investment Education and Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.


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